You are considering the purchase of an apartment complex that will generate net cash flows each of the next 20 years, starting at $600,000 in Year 1. You normally demand a 10% rate of return on such investments. Future cash flows after year 1 are expected to grow with inflation at 3% per year. How much would you be willing to pay for the complex today if it will have to be torn down in 20 years, and there is no salvage value?

You are considering the purchase of an apartment complex that will generate net cash flows each of the next 20 years, starting at $600,000 in Year 1. You normally demand a 10% rate of return on such investments. Future cash flows after year 1 are expected to grow with inflation at 3% per year. How much would you be willing to pay for the complex today if it will have to be torn down in 20 years, and there is no salvage value?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 5P

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